National Pension System (NPS)

Background and Purpose

• Launched in 2004, NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
• Initially, it was meant only for Central Government employees (except Armed Forces) joining service on or after 1 January 2004.
• Later, almost all State Governments (except West Bengal) adopted it, and eventually, it was opened for all Indian citizens including those in the private and unorganized sector.

👉 Its purpose is very clear: to provide a sustainable retirement income and to cultivate the habit of saving for old age among citizens.

Beneficiaries and Coverage

• Who can join? Any Indian citizen (resident or non-resident) between 18–65 years of age.
• Coverage: Employees of public, private, and unorganized sectors.

Objectives

1. To provide retirement income to all citizens.
2. To inculcate the habit of systematic long-term savings for retirement.

Structure of Accounts

(i) Tier I Account

• Mandatory, non-withdrawable retirement account.
• Contributions are locked till retirement (with limited partial withdrawals).
• Provides tax benefits.

(ii) Tier II Account

• Voluntary savings facility.
• Subscriber can withdraw anytime.
• No tax benefits attached.
• Can only be opened if the person already has a Tier I Account.

Contribution and PRAN

• Both individuals and employers can contribute.
• Each subscriber is allotted a Permanent Retirement Account Number (PRAN) which is portable across India.

Investment Choices – 3 Funds Offered

Subscribers can choose how their money is invested:

1. Equities
2. Corporate Bonds
3. Government Securities

👉 This ensures a balanced mix of risk and safety depending on the subscriber’s choice.

Withdrawals and Exit Provisions

(i) Partial Withdrawal (from Tier I)

• Allowed after 3 years of joining.
• Permitted only for specific purposes:
  • Education, marriage, house purchase, health expenses, skill development, etc.
• Limit: Up to 25% of contributions.
• Maximum of 3 withdrawals allowed in the entire tenure.

(ii) Premature Exit (before 60 years, after minimum 10 years)

• If accumulated corpus ≤ ₹1 lakh → Full withdrawal allowed.
• If corpus > ₹1 lakh → Only 20% as lump sum, and 80% must be used to purchase an annuity (monthly pension).

(iii) Exit at Age 60 or Superannuation

• Minimum 40% of corpus must be invested in an annuity (to provide monthly pension).
• Remaining 60% can be withdrawn as lump sum.

Tax Benefits

• EEE Status → Exempt at Entry, Investment, and Exit.
• Contributions eligible for deductions under the Income Tax Act(Old Regime):
  • Section 80C → Up to ₹1.5 lakh.
  • Section 80CCD(1B) → Additional ₹50,000.
• Withdrawal:
  • 25% interim withdrawal (from Tier I) is tax-free.
  • 60% lump sum withdrawal at retirement is tax-free.
  • 40% annuity investment is also tax-exempt.

Salient Features in Brief

• Market-linked returns (higher than fixed deposits in long run).
• Portable account (useful for private sector and migrants).
• PRAN ensures unique lifelong identity.
• Provides both social security and financial discipline.

✅ In summary:
The National Pension System (NPS) is India’s flagship pension scheme, open to all citizens. With its dual account structure (Tier I & II), market-linked returns, and tax benefits, it encourages disciplined retirement savings. Its flexibility (choice of equity, bonds, or government securities) and portability make it an ideal tool for building financial security in old age.